Can tenants use COVID-19 as a defence for commercial rent arrears?

In the first reported case on commercial rent arrears citing COVID-19 as a defence, the High Court handed down its judgment on 16 April 2021 in the case of Commerz Real Investmentgesellschaft v TFS Stores Ltd.

It has been variously described as a victory for landlords, but that is not the whole story. In this article, real estate partner James Daglish discusses why this case provides much-needed judicial guidance on a landlord’s ability to recover rent and service charge due over the pandemic, and highlights the importance for engagement and open and honest conversations about financial positions.

The case

The case centred on the rent arrears owed by TFS Stores Ltd for its unit in the Westfield Shopping Centre in Shepherds Bush, where it trades as The Fragrance Shop.

The unit had been closed from 26 March 2020 when the first national lockdown started. It then re-opened on 15 June 2020 before closing for the second lockdown between 5 November 2020 and 2 December 2020. There was a further short period of trading, and then closure from 19 December until 12 April 2021.

Since April 2020, it had not paid any rent. It was also in arrears of service charge.

TFS Stores Ltd had put forward three main grounds for defending the claim, which were, in short:

1. That the claim had been issued prematurely contrary to the ‘Code of Practice for commercial property relationships during the COVID-19 pandemic’.
2. That the claim was a means of circumventing the Government measures put in place to prevent forfeiture winding-up and recovery using Commercial Rent Arrears Recovery (CRAR).
3. That it was reasonable to expect the landlord to insure against loss of rent due to forced closures and/or denial of access due to notifiable diseases and/or Government action.

The first two arguments were dealt with very easily; it has long been underlined that while the Government had suspended the ability to exercise various arrears recovery methods, such as CRAR, landlords were not prevented from issuing proceedings for arrears. It has also always been emphasised that the Code of Practice is voluntary.

For the third argument, the judge found that the terms of the lease did not oblige the landlord to include notifiable diseases and/or Government action as an insured risk. Nor did it require the landlord to insure for the tenant’s business against loss. Courts are incredibly reluctant to imply terms into commercial contracts and therefore, the rent remained a legal requirement.

A short shrift was duly given to the Defendant’s case by Chief Master Marsh.

A closed case?

Well, not quite.

All cases will turn on their own facts, and we must not lose sight of the fact that the decision was made by a High Court Master in a summary judgment application, rather than a full trial. It may be appealed.

There are in any event a large number of COVID-19 rent arrears cases waiting to be heard. This case will not be the last gasp, by any means.

However, there is a practical point that can easily be overlooked here, which is the conduct of the parties.

It is notable that there was “significant engagement” by the landlord to reach an arrangement with the tenant in respect of the arrears. On the flip side, the court noted the “lack of engagement” on the part of TFS Stores Ltd.

That theme could also be seen in the approach to case management by TFS Stores Ltd, with it being noted that it failed to act promptly – for example, waiting over a month following notification of the application for summary judgment to instruct counsel, and requesting key documents by way of disclosure late in the day.

Code of Conduct

The Code of Conduct produced by the Government has by no means done the job the Government seemed to hope it would do. Hence the Government’s call to evidence to look for a more viable solution. Well-publicised initial ‘wins’ for landlords could well have a bearing on the outcome of that process.

Moreover, the Code does contain two themes which are important: transparency, and engagement. Where those principles are followed, and consistently, constructive results are being achieved in the majority of cases.

Although not mentioned in the judgment, a factor, also noted in the Code, and referred to specifically in the other COVID-19 rent case, Bank of New York Mellon (International) Ltd and v Cine-UK Ltd and others, is the tenant’s ability to pay the rent. If a tenant can pay (some or all of the rent), but won’t, or refuses to disclose whether it can pay, do not expect to be shown much sympathy from either the landlord or the courts!

For now, parties should continue to engage, engage, engage. And tenants should be upfront, and clear about their financial position.

If you have any questions relating to the outcome of this case, please get in touch with James Daglish using the below details.